Will the FRTB reshape trading books in Europe post‑2027?

What is the Fundamental Review of the Trading Book and why it matters post‑2027

The European Commission’s decision to postpone the implementation of the Fundamental Review of the Trading Book (FRTB) to 1 January 2027 has refocused attention on how Basel III’s market risk overhaul will affect European banks’ trading operations. The FRTB, part of the final Basel III standards, was designed to align capital charges with real-world market risks through stricter boundaries, enhanced internal models, and a shift to an Expected Shortfall metric from the traditional Value-at-Risk framework.

While the majority of Basel III reforms took effect in the European Union on 1 January 2025, the FRTB was delayed once to 2026 and again this June due to misalignment with other jurisdictions. The European Commission cited ongoing delays in the United States and United Kingdom as key reasons for deferring the rule’s application, aiming to preserve a level playing field for internationally active European banks. Analysts see the delay as a critical window to restructure trading book frameworks, test new models, and recalibrate product pricing strategies in anticipation of deeper market-risk capital requirements.

How are EU banks restructuring trading-book boundaries ahead of FRTB?

One of the FRTB’s most consequential reforms lies in the redefinition of what constitutes the trading book. Under the revised framework, assets held with trading intent must now meet stricter eligibility requirements, including daily pricing and active risk management. Instruments not meeting these conditions are expected to migrate to the banking book, where credit risk capital rules apply. Conversely, assets misclassified into the banking book to reduce capital costs will face closer scrutiny.

The European Union’s 2024 Banking Package already introduced these boundary rules from January 2025, even ahead of full FRTB adoption. As a result, EU banks have begun to reassess how they classify complex derivatives, structured products, and illiquid exposures. According to a mid-2024 analysis by Deloitte, institutions are accelerating investment in desk-level structure realignment, data integration, and model approval strategies to prepare for 2027. Tier 1 banks like BNP Paribas, Deutsche Bank, and Societe Generale are leading early-stage simulations across their trading books to assess exposure shifts and revenue impact under FRTB.

What impact will expected shortfall models have on capital and pricing?

The most visible impact of the FRTB is its replacement of Value-at-Risk with the Expected Shortfall methodology, which captures tail risk more effectively by considering losses beyond the 97.5th percentile. This change increases capital sensitivity to market volatility, especially during stressed conditions. The European Banking Authority previously estimated that the switch could raise average market-risk capital requirements by 32.5%, with wide institution-level variation ranging from –12.9% to +82.8%, depending on portfolio composition and model sophistication.

For trading desks managing illiquid assets or exotic derivatives, these higher capital charges may translate into increased product pricing or reduced inventory. Banks that rely on the Internal Models Approach (IMA) to optimize capital will also face stricter validation hurdles. According to BNP Paribas’s 2023 capital forecast, early FRTB implementation could have cost the bank as much as 90 basis points in CET1 ratio impact, reinforcing the rationale for a phased rollout.

As European regulators consider whether to introduce a transitional “risk multiplier” to smooth capital impacts, some analysts suggest that derivatives desks may increasingly adopt clearing solutions and standardised exposures to contain capital consumption. The pricing dynamics of structured credit, OTC FX, and long-dated options could shift notably as banks internalize FRTB costs.

How are trading desks and IT teams preparing for the transition?

For risk and compliance teams, the FRTB’s requirements introduce more than just conceptual changes. Trading desks must now operate under a desk-level model approval regime, meaning that risk engines must be able to distinguish desk-by-desk capital metrics, pass daily backtesting, and attribute profit and loss to modelled risk factors.

This level of granularity demands robust IT infrastructure and high-quality market data. Several European banks have adopted “parallel reporting environments,” running internal simulations of FRTB exposures alongside current regulatory capital systems. This allows compliance teams to assess early warning indicators and communicate with supervisors well before go-live.

Regulators have responded by issuing updated guidance through the European Banking Authority and national competent authorities. Still, industry experts caution that the approval pipeline for IMA desks could become congested by 2026, as banks across the bloc submit model documentation en masse. Given that FRTB also tightens requirements around Non-Modellable Risk Factors (NMRFs), firms with illiquid product exposures are expected to either increase capital buffers or exit marginally profitable desks entirely.

How global misalignment continues to influence EU decisions

While the technical readiness of European banks may be improving, global coordination on FRTB implementation remains fragile. The U.S. Federal Reserve has not confirmed a firm timeline for FRTB adoption, and while the U.K. Prudential Regulation Authority has made progress on consultations, its enforcement date is also likely to lag the EU’s 2027 target. This divergence poses regulatory arbitrage risks for globally active firms.

In its June 2025 statement announcing the latest delay, the European Commission made clear that Europe would not impose capital constraints that could impair competitiveness while other jurisdictions hold back. The delay, while not indefinite, reflects an ongoing balancing act: aligning with Basel standards while protecting the competitiveness of the EU’s financial sector.

The Commission also hinted that it may revisit the FRTB’s calibration or rollout structure again in late 2026, depending on international progress. This uncertainty continues to influence how banks allocate IT budgets, structure new products, and prioritise desk consolidation or expansion.

Why institutional investors are watching FRTB-linked RWA shifts

For investors tracking bank profitability and return-on-equity metrics, FRTB introduces new layers of complexity. As banks adopt more conservative internal models and adjust risk appetites, some revenue lines—especially in trading and sales—may see temporary headwinds. However, the broader push toward more risk-sensitive capital is seen as positive from a credit and stability perspective.

Asset managers and equity analysts are also preparing for potential increases in risk-weighted assets (RWA) disclosures from 2026 onward. While FRTB may initially weigh on trading margins, it is likely to provide a more transparent and comparable view of market risk across institutions. Some buy-side desks are already requesting enhanced capital attribution data from counterparties, especially when pricing bespoke derivative transactions.

Regulatory analysts and market observers have generally viewed the EU’s measured approach as a pragmatic response to global misalignment. The delay is seen as reducing short-term volatility in capital requirements while preserving the longer-term objectives of market risk reform. Some analysts have noted that banks relying on the Standardised Approach under the FRTB may experience fewer immediate headwinds, but could ultimately lag behind peers using validated Internal Model Approaches in terms of capital efficiency and competitive positioning.

What the next 18 months look like for EU risk teams and policymakers

With the new 2027 timeline in place, EU institutions have roughly 18 months to finalise model documentation, engage with regulators, and refine systems for compliance. Supervisors are expected to begin formal desk-level model assessments from 2026 onward, and many banks are already ramping up their internal validator and quantitative risk staffing to meet anticipated demand.

The European Banking Authority may also issue further guidance on desk structure, liquidity criteria, and market data eligibility in the months ahead. Meanwhile, the European Commission will continue monitoring global developments to decide whether additional relief measures, including transitional multipliers or phased calibration, may be appropriate.

In this interim period, banks are advised to follow “no-regret strategies” by investing in infrastructure, reducing dependency on NMRFs, and aligning trading activity with regulatory intent. Institutions that embed FRTB assumptions early into their strategic planning are more likely to benefit from smoother implementation, more accurate pricing, and favourable supervisory outcomes.

What long-term changes the FRTB will bring to European trading desks by 2027

The European Commission’s decision to delay the Fundamental Review of the Trading Book may offer breathing room, but it does not diminish the scale of transformation awaiting EU banks. By 2027, trading desks across Europe will be redefined not only in structure but also in how they measure, report, and capitalise risk. Unlike previous reforms that focused largely on credit exposures or macroprudential buffers, the FRTB forces banks to demonstrate risk sensitivity and data discipline at the most granular level—desk by desk, product by product, and model by model.

For the first time, internal models will require regulatory approval at the trading-desk level, subject to daily backtesting, P&L attribution validation, and thresholds around modellable risk factors. This means that desk heads, risk managers, and quants must work in concert to align commercial intent with capital realism. Risk-weighted assets can no longer be justified with portfolio-wide averages or legacy assumptions. Capital will be explicitly linked to empirical data quality, stress period calibration, and model transparency.

Banks that fail to meet internal model criteria will fall back to the Standardised Approach, where risk charges are likely to be less nuanced and potentially more punitive for complex products. This could accelerate desk consolidation, especially in low-volume or high-NMRF trading segments, and potentially push some exposures off balance sheets entirely or onto clearing platforms.

Product innovation may also be affected. Structured and long-dated derivatives, which often rely on illiquid inputs, could become less economically viable under the tighter capital framework unless supported by robust market data. Conversely, standardised and vanilla products may gain share due to their lower risk-weighting and operational simplicity under FRTB constraints.

The rule will also compel a new level of cross-function collaboration between front office, risk, IT, and compliance functions. Data lineage, model explainability, and real-time risk attribution will become as critical to a trading desk’s performance as market positioning. Institutions that treat FRTB as a compliance exercise risk falling behind; those that view it as a strategic inflection point may emerge more agile, transparent, and better capitalised.

Finally, the success of this transformation will depend not only on internal readiness but also on regulatory convergence across major financial centres. If misalignment persists—particularly between the EU, U.S., and U.K.—global banks may be forced to navigate conflicting capital incentives, risking fragmentation in capital markets. EU regulators have signaled willingness to revisit calibration in 2026 if global peers lag significantly.

In short, the FRTB is no longer an abstract regulatory concept. It is a catalyst for a generational shift in European market-risk governance. By 2027, trading operations will not only look different—they will be measured, priced, and supervised through a fundamentally new lens, redefining the capital economics of financial intermediation in the European Union.